Goldman sees commodities bull run over as returns trail stocks

Largest Retailer

Cheaper raw materials may boost margins for companies from McDonald’s Corp. to General Mills Inc. to Boeing Co., while keeping inflation in check and allowing the Federal Reserve to continue stimulus. Kraft Foods Group Inc. cut the cost of its Gevalia coffee by 6% last month and Wal-Mart Stores Inc., the world’s largest retailer, is reducing grocery prices. U.S. retail gasoline fell 4.5% from this year’s peak in February, American Automobile Association data show.

Hedge funds and other large speculators are holding a net- long position of 652,708 futures and options across 18 U.S. commodities, from 1.3 million in September, government data show. Supply will exceed demand for 12 of 18 of the metals and agricultural products, according to estimates from Barclays and Rabobank International.

West Texas Intermediate crude oil will average $90 a barrel this year, from $94.15 in 2012, Citigroup estimates. U.S. inventories reached the highest since 1931 on May 24, government data show. New drilling technology is unlocking supplies trapped in shale formations, helping the U.S. meet the highest proportion of its own energy needs since 1986. Crude rose 2.7% in New York trading this year.

Exchange Traded

Gold dropped 17%, the worst start to a year since 1982. Holdings through exchange-traded products tumbled 19% to the lowest since May 2011. Bullion will drop this year for the first time since 2000, according to a Bloomberg survey of 38 analysts.

The LMEX index of six industrial metals fell 6.3%. Copper stockpiles tracked by exchanges in London, Shanghai and New York more than doubled in the past year. Production will outpace demand for the first time in four years in 2013, Morgan Stanley predicts. Prices will decline about 6% in 12 months, Goldman estimates.

Farmers around the world will harvest the biggest grain and soybean crops ever, the U.S. Department of Agriculture estimates. Corn will extend this year’s 22% decline by another 3.2% in six months, as wheat drops 11%, Goldman says.

“You have the combination of higher production together with slower growth in China,” said Adrian Day, who manages about $135 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. “For rest of the year, you have a potential surplus of production over demand, which obviously means lower prices.”

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